Growth is the goal for most businesses, and eventually that business growth will be limited by state boundaries. Generally speaking, extending your business across state lines is a fairly easy process. Unless you have some sort of state-specific market, expansion beyond state lines generally doesn’t require a whole new business plan, just a tweaking of what you already created to find success in your home state.
Here are 5 things to keep in mind if you plan on doing business out of state.
Am I Actually “Operating” In Another State?
Furthered by the COVID pandemic, ecommerce experienced quite the boom amidst stay-at-home orders and online schooling, and is expected to continue being much more relied upon than it was before the pandemic. Having buyers from other states, whether you sell them a product or service doesn’t necessarily mean you’re operating out of state from a legal standpoint.
In most cases, you have to check at least one of these major boxes in order to worry about whether or not you need to take any legal action within the state (which is normally relative to taxation):
- Owning property in the state (especially in cases where a product is produced or a service is performed)
- Utilizing a third-party distributor in that state (an easy example would be a cheese company selling to a grocery store chain)
- Having regular meetings within a state
- Operating a bank account within a state
Some business owners are very unpleasantly surprised when they take their product or service to a new state, as they failed to realize how vastly different trends and demographics are within a country this large. With things like social media and 500 channels to choose from on TV, big trends can move quickly. However, if your product or service is popular in your locale because of things like longevity and word-of-mouth advertising, it’s very important to ensure the people in your next location share ideas and interests with the ones in your current location.
Time to Incorporate?
Incorporating can help dodge some issues for owners of more unorthodox business models (such as a full-time remote office). Corporations are viewed by the IRS as entities different from those individuals who run them, and you can, indeed save yourself some money by incorporating in one state compared to another, then conducting your work wherever you want, funneling it through the corporation. You do have to have provable reasoning for why you are in that state, or you could face penalties from the IRS.
If you do incorporate in one state, you then need to file what is called a foreign qualification to do business in another state (refer to the first paragraph to determine if your operations are actually such from a legal standpoint). Generally, filing a foreign qualification is easier than incorporating your business, however, operations do vary from state to state. The best place for information is the office of your Secretary of State.
Doing business in another state, incorporating, and/or filing or a foreign qualification all center around, at least in some aspect, taxation. States want to get paid when work is done within their borders, and the penalties can be very harsh. Hiring some legal help isn’t a bad idea, especially if you’re really starting to make some money from sources beyond your own state’s borders!